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Budgets coupled with responsibility accounting provide feedback to top managers about the performance relative to the budget of different responsibility center managers.

Differences between actual results and budgeted amounts—called variances—can help managers implement strategies and evaluate them in three ways:

1. EARLY WARNING. Variances alert managers early to events not easily or immediately evident. Managers can then take corrective actions or exploit the available opportunities. For example, after observing a small decline in sales during a period, managers may want to investigate whether this is an indication of an even steeper decline to come later in the year.
2. PERFORMANCE EVALUATION. Variances prompt managers to probe how well the company has implemented its strategies. Were materials and labor used efficiently? Was R&D spending increased as planned? Did product warranty costs decrease as planned?
3. EVALUATING STRATEGY. Variances sometimes signal to managers that their strategies are ineffective. For example, a company seeking to compete by reducing costs and improving quality may find that it is achieving these goals but that it is having little effect on sales and profits. Top management may then want to reevaluate the strategy.